PAKISTAN CEMENT SECTOR POSTS LOSSES FOR 3QFY20.

Byline: SHABBIR H. KAZMI

Cement manufacturers in Pakistan have posted losses for 3QFY20 as compared to proA!t for 3QFY19 and 2QFY20. This raises concerns because the outcome of 4QFY20 could be even worse, because of prolonged lockdown and Ramadan impact. However, the silver lining is the package announced by the government for the construction industry. This analysis is based on a report by one of Pakistan's leading brokerage house, Topline Securities, based on 11 listed cement manufacturers out of 15, representing 95% of the total sector market capitalization. The brokerage house has taken into account only those companies which have already announced quarterly results for January March 2020.

The deterioration in proA!tability during the quarter was mainly due to declining cement prices amidst competition over market share as industry production capacity has increased by over 50% to 70 million tons over the past three years. Gross margins during the quarter fell further. This fall could be attributed to decline in retention prices up to 35% for the manufacturers located in the northern region, during the outgoing quarter to an average of Rs250 per bag. During 9MFY20, gross margins declined to 6.6% as retention prices declined by 25%YoY.

Lower retention prices could be attributed to A!erce competition, after recent expansion cycle which has limited their ability to pass on rising costs emanating from currency devaluation, grid rates and increase in duties (FED). As a result of lower prices, net sales for the sector declined by 16%YoY during 3QFY20 despite of an increase in volumetric sales by 8.2%YoY (Northern region increase by 12% YoY and Southern region decrease by 1.3% YoY). During 9MFY20, volumetric sales increased by 7.1%YoY led by 11% growth in Northern region, while Southern region witnessed 3.1% decline

Financial cost increased by 57%YoY during outgoing quarter due to increase in bank borrowings coupled with change in accounting treatment of this head from capitalization to expensing out after commercial operations of new plants. The companies recorded tax reversal of Rs1.1 billion cumulatively as e ective tax rate of 7.4%, amounting to Rs829 million for 3QFY19.

DG Khan Cement (DGKC) has reported a loss of Rs2.3/share for 3QFY20 as compared to earnings of Rs2.0/share for 3QFY19.

The Company has posted loss of Rs4.2/share for 9MFY20, as against earnings of Rs6.0/share in 9MFY19, which can be attributed to erosion in gross margins. A...